Plantation

By Selena Leong,
DMG & Partners


According to Oil World, world supplies of soybeans have tightened significantly as a result of the severe crop losses in South America. Approximately two thirds of the main oilseed & grain crop regions in Argentina are in a severe drought situation, stressing crops and leading to irreversible damage. Argentine soybean & corn crops are among those that suffered the most damage.

According to Oil World's assessment, an estimated 21m tonnes of the oilseed and grain crops have been lost or destroyed as at end Jan 09 due to drought, smaller planting areas and reduced application of fertilizer and other inputs. This drought would affect the production of soybean oil, considered a substitute for palm oil, thereby likely to be a main factor in buoying CPO prices recently.

Slower production growth of palm oil
In addition, the slowdown in the production growth of palm oil could have a firming effect on prices in the recent weeks. According to Oil World, the YoY percentage growth of world palm oil production slowed down from 17% between the period of April to June 08, to 7% in the July to Sept 08 and 5% in the Oct to Dec 08 period.

Uptrend in CPO prices likely unsustainable
In late Jan, the IMF reduced its world GDP growth forecast for 2009 from 2.2% to only 0.5%, the lowest in 60 years. Growth is expected to slow to 6.75% in China and 5% in India (both countries are amongst the top 5 exporting destinations by volume for Malaysian palm oil). This setback in economic growth is most likely affecting demand for food, particularly in low income countries.

With the continuing weak macro economic conditions and relatively high inventory levels of palm oil, we opine that the current uptrend in CPO prices is likely to be capped. We are neutral on the sector and have a neutral call with target price of S$0.51 for Indofood Agri Resources (IFAR) and a sell call with a target price of S$0.21 for First Resources (FR), both based on 7x FY09F earnings.

Disclaimer
This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report.

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